Using student loans to pay credit card debt, grad school edition
July 30, 2013 10:21 AM Subscribe
My partner and I have about $8k in credit card debt, built up over the last 10 years of undergrad followed by underemployment. I'm starting graduate school in the fall, with a fully-funded research assistant position and tuition waivers. I am thinking about borrowing ~$10k of the federal direct student loans I've been offered in order to pay down the credit card debt. What should I be considering?
At first glance, it seems like a no-brainer; all of our credit card debt is held at ridiculously high interest rates, and the expensive payments keep us living paycheck to paycheck and make it impossible to save. The student loan interest rate is fixed, there are income-based repayment plans, and they offer generous forbearance options (at least compared to the credit card companies). The only downside to this plan that I can see is that student loan debt cannot be discharged in bankruptcy. The credit card debt is our only debt (other than my student loans from undergrad), we don't have kids or a house, and I don't see us declaring bankruptcy anytime soon. I know this is just borrowing from Peter to pay Paul and won't solve our long-term financial issues, but when Peter offers great terms and Paul takes 1/3 of your money every month, it's hard to resist.
What else am I not considering? Have you done this and did it work out? I acknowledge that this might be against the precise letter of the law of my student loan terms, but for argument's sake let's assume I'm ethically OK with using my loan funds for slightly off-label purposes as long as the funds are still used responsibly (no lavish spring break trips or coke binges).
Bonus question - how does an RA/TA stipend generally count against expected family contribution for financial aid purposes? I'm assuming it doesn't affect this year's aid offer, but that all that taxable income will increase my EFC next year - please let me know if that isn't how it worked for you.
At first glance, it seems like a no-brainer; all of our credit card debt is held at ridiculously high interest rates, and the expensive payments keep us living paycheck to paycheck and make it impossible to save. The student loan interest rate is fixed, there are income-based repayment plans, and they offer generous forbearance options (at least compared to the credit card companies). The only downside to this plan that I can see is that student loan debt cannot be discharged in bankruptcy. The credit card debt is our only debt (other than my student loans from undergrad), we don't have kids or a house, and I don't see us declaring bankruptcy anytime soon. I know this is just borrowing from Peter to pay Paul and won't solve our long-term financial issues, but when Peter offers great terms and Paul takes 1/3 of your money every month, it's hard to resist.
What else am I not considering? Have you done this and did it work out? I acknowledge that this might be against the precise letter of the law of my student loan terms, but for argument's sake let's assume I'm ethically OK with using my loan funds for slightly off-label purposes as long as the funds are still used responsibly (no lavish spring break trips or coke binges).
Bonus question - how does an RA/TA stipend generally count against expected family contribution for financial aid purposes? I'm assuming it doesn't affect this year's aid offer, but that all that taxable income will increase my EFC next year - please let me know if that isn't how it worked for you.
I did it...the way I looked at it was the interest on the credit card is much higher than the student loans.
posted by fromageball at 10:29 AM on July 30, 2013
posted by fromageball at 10:29 AM on July 30, 2013
Towards the end of my school days I took out a $3,000 student loan to buy a used car. I had no qualms about the ethics of using a student loan for something that wasn't academically related - as you mentioned, other folks were using their loans for coke binges and spring break trips. Buying a clunky old car was kind of a prudent thing to do, in comparison.
It worked out great for me. I consolidated all of my loans a few years later and now my car (and the other loans) are neatly locked into a very good interest rate. If the option is available to you, I'd go for it and not feel bad about it.
posted by Elly Vortex at 10:32 AM on July 30, 2013
It worked out great for me. I consolidated all of my loans a few years later and now my car (and the other loans) are neatly locked into a very good interest rate. If the option is available to you, I'd go for it and not feel bad about it.
posted by Elly Vortex at 10:32 AM on July 30, 2013
Student loan debt also has tax benefits. Credit cards do not. You can write off your interest on one.
My suggestion though is to not borrow more than your have on your credit cards. Surfing balances is fine. Going further in debt is not. Surfing a balance just to run the cards back up is also a bad idea. Pay them off. Cut them up.
This does solve some of your long term financial problems. If you have the money you previously paid in interest you can do more with your money (rather than giving it to some banker).
posted by cjorgensen at 10:37 AM on July 30, 2013
My suggestion though is to not borrow more than your have on your credit cards. Surfing balances is fine. Going further in debt is not. Surfing a balance just to run the cards back up is also a bad idea. Pay them off. Cut them up.
This does solve some of your long term financial problems. If you have the money you previously paid in interest you can do more with your money (rather than giving it to some banker).
posted by cjorgensen at 10:37 AM on July 30, 2013
One thing is that you can't discharge Student Loan debt in bankruptcy court.
posted by Ruthless Bunny at 10:40 AM on July 30, 2013 [5 favorites]
posted by Ruthless Bunny at 10:40 AM on July 30, 2013 [5 favorites]
I've been doing something like this. I have no qualms because I need the money I'm getting from the loans in order to pay off my debts so I can go to school. It's roundabout, but it is enabling me to go to school so I consider it on-point. This semester I'll be transfering the last of my credit card debt to student loans, and then I'm going to start saving so I can start paying my student loans. Even at a lower interest rate, they're accruing interest.
My advice is to do it, but don't pretend that debt has now disappeared -- consider yourself in the red, and once you've saved up an emergency fund, use the rest of your income to pay off your loans.
posted by DoubleLune at 10:44 AM on July 30, 2013
My advice is to do it, but don't pretend that debt has now disappeared -- consider yourself in the red, and once you've saved up an emergency fund, use the rest of your income to pay off your loans.
posted by DoubleLune at 10:44 AM on July 30, 2013
Bonus question - how does an RA/TA stipend generally count against expected family contribution for financial aid purposes? I'm assuming it doesn't affect this year's aid offer, but that all that taxable income will increase my EFC next year - please let me know if that isn't how it worked for you.
EFC is basically meaningless for grad-level aids, unless you have some institutional funding beyond the standard federal loan offers - Bill Gates would get the same aid offer as you. Your assistantship will count against your overall financial aid eligibility (the limit in loans, grants, scholarships, and stipends that you can receive for the year), so you may not be able to receive all 8K in loan refunds between the fall and spring semester, depending on your costs and such.
posted by Think_Long at 11:27 AM on July 30, 2013
EFC is basically meaningless for grad-level aids, unless you have some institutional funding beyond the standard federal loan offers - Bill Gates would get the same aid offer as you. Your assistantship will count against your overall financial aid eligibility (the limit in loans, grants, scholarships, and stipends that you can receive for the year), so you may not be able to receive all 8K in loan refunds between the fall and spring semester, depending on your costs and such.
posted by Think_Long at 11:27 AM on July 30, 2013
Can you take the student loan to pay off the credit card, BUT continue your payments as usual on the student loan to actually get rid of debt faster rather than prolonging it? IF the "light at teh end of the tunnel" can be seen paying off the debt withthe student loan rate, it may make it hurt less to funnel so much money into it, because once it's gone, all thath money can be funnelled into savings (and imagine how rapid that savings pace will seem!)
posted by WeekendJen at 12:00 PM on July 30, 2013
posted by WeekendJen at 12:00 PM on July 30, 2013
One thing is that you can't discharge Student Loan debt in bankruptcy court.
I used student loans to pay one credit card, while I was in grad school. All these years later, hit hard by the economy (and other factors), I'm seriously considering bankruptcy, and left with the reality that that credit card is now a student loan that will stay with me until I'm dead, buried, and decayed.
Please don't do this.
posted by MoxieProxy at 12:14 PM on July 30, 2013 [4 favorites]
I used student loans to pay one credit card, while I was in grad school. All these years later, hit hard by the economy (and other factors), I'm seriously considering bankruptcy, and left with the reality that that credit card is now a student loan that will stay with me until I'm dead, buried, and decayed.
Please don't do this.
posted by MoxieProxy at 12:14 PM on July 30, 2013 [4 favorites]
If you are not married, you may want to seriously consider whether switching over some of your partner's credit card debt onto something that is in your name only is a good idea for you. It's not something to do without careful thought.
Others have already cover the bankruptcy angle. Not something to ignore if the job market is at all sketchy in your chosen field - you may end up unemployed for longer than you think.
That said, if I were you and the job market is reasonable enough to expect a short unemployment period after graduating, I'd do it in a heartbeat. 10k is not a big deal to carry around as a student loan, but you'll pay a fortune on 10k of credit card debt. IMO it is a totally ethical use of money - you're investing in your future by reducing your expenses now (high interest). As long as you aren't trying to convince someone you'll starve without the loan, you're fine.
A huge caveat is that you absolutely have to address the cause of the debt - if it's just from having no income for way too long and you're otherwise frugal, it's probably not a big deal since you have a guaranteed (?) income for grad school. If it's an inability to live within your means, taking out a student loan will just be giving yourself more rope to hang yourself with, and worse, rope that won't go away in a bankruptcy.
posted by randomnity at 12:28 PM on July 30, 2013
Others have already cover the bankruptcy angle. Not something to ignore if the job market is at all sketchy in your chosen field - you may end up unemployed for longer than you think.
That said, if I were you and the job market is reasonable enough to expect a short unemployment period after graduating, I'd do it in a heartbeat. 10k is not a big deal to carry around as a student loan, but you'll pay a fortune on 10k of credit card debt. IMO it is a totally ethical use of money - you're investing in your future by reducing your expenses now (high interest). As long as you aren't trying to convince someone you'll starve without the loan, you're fine.
A huge caveat is that you absolutely have to address the cause of the debt - if it's just from having no income for way too long and you're otherwise frugal, it's probably not a big deal since you have a guaranteed (?) income for grad school. If it's an inability to live within your means, taking out a student loan will just be giving yourself more rope to hang yourself with, and worse, rope that won't go away in a bankruptcy.
posted by randomnity at 12:28 PM on July 30, 2013
Can you find a low interest credit card and transfer your balance instead? I transferred an $8K credit card debt to Capital One's prime +1% card while I was still paying off student loans and it ended up being the cheaper debt of the two by a lot (my student loans were a floating prime + 5%) AND the first six months or something were 0% interest. I saved literally thousands of dollars and didn't have to worry about never being able to discharge the debt if things went pear shaped. Caveat: I'm in Canada and don't know if what interest rates are like in the U.S.
posted by looli at 9:31 PM on July 30, 2013
posted by looli at 9:31 PM on July 30, 2013
I know this is just borrowing from Peter to pay Paul and won't solve our long-term financial issues
Beyond the bankruptcy question I think the above is your most substantial downside. The practical reality for most people is that a habit of overspending persists despite increases in income or decreases in expenses, so if your strategy for not acquiring new debt to replace the old is "well things will be better because the situation is better" and nothing more, then you're likely to end up in more credit card debt, leaving you in the same boat WRT interest and with greater overall debt to boot. This has happened to many many people (including me), you are not immune, you are not special, the same attitude towards debt that got you into this in the first place can get you in worse.
If you do this you will have a bunch of shiny new empty credit accounts and may very well get offered more (or have your credit limits increased whether you ask for it or not). They do this because they know it "feels" more acceptable to let hundreds (leading inevitably to thousands) of debt accumulate on an account with 20 thousand of credit available versus 5 thousand. And this psychology works, it doesn't matter if you tell yourself you're too smart to fall for it.
So maybe consider the bargain that you are going to do those things you always say you're going to do, make a budget and track it and insist that you save for non-essentials rather than charge them - and you have to have it actually working before you're allowed to use those student loans. Maybe interrogate harder why you need $10k to pay off $8K of debt (you don't have to explain this to me, I don't care). If you have by careful calculation determined you actually need those $2K to pay your educational expenses okay. If you're planning to take a vacation or buy a car or stereo or just think it would be nice to "have some extra money around" and "it will be okay because this debt will be so much cheaper" then you're already in the process of making this transition a path to greater indebtedness. Again this is all just based on a greatest hits compilation called Dumbest Choices Of My Youth, maybe you are facing this all in a much better and more realistic frame of mind. Finally I imagine you don't have to pay any of this back at all while you're in school? Maybe don't just accept that as the reasonable status quo - put something at least - maybe half the interest you're currently paying each month on those credit loans? Or 1.5X the interest the student loans accrue - against the new debt every month.
Getting back to your statement I quoted above though - if you don't make this part of an overall strategy to fix those long-term financial issues then it will end up as part of an unintentional strategy that makes those long-term financial issues worse. Don't believe you're special in this regard if you have no evidence to back it up. From painful experience that is being slowly corrected on a depressingly long time scale.
posted by Luke Skywalker at 8:21 AM on July 31, 2013 [2 favorites]
Beyond the bankruptcy question I think the above is your most substantial downside. The practical reality for most people is that a habit of overspending persists despite increases in income or decreases in expenses, so if your strategy for not acquiring new debt to replace the old is "well things will be better because the situation is better" and nothing more, then you're likely to end up in more credit card debt, leaving you in the same boat WRT interest and with greater overall debt to boot. This has happened to many many people (including me), you are not immune, you are not special, the same attitude towards debt that got you into this in the first place can get you in worse.
If you do this you will have a bunch of shiny new empty credit accounts and may very well get offered more (or have your credit limits increased whether you ask for it or not). They do this because they know it "feels" more acceptable to let hundreds (leading inevitably to thousands) of debt accumulate on an account with 20 thousand of credit available versus 5 thousand. And this psychology works, it doesn't matter if you tell yourself you're too smart to fall for it.
So maybe consider the bargain that you are going to do those things you always say you're going to do, make a budget and track it and insist that you save for non-essentials rather than charge them - and you have to have it actually working before you're allowed to use those student loans. Maybe interrogate harder why you need $10k to pay off $8K of debt (you don't have to explain this to me, I don't care). If you have by careful calculation determined you actually need those $2K to pay your educational expenses okay. If you're planning to take a vacation or buy a car or stereo or just think it would be nice to "have some extra money around" and "it will be okay because this debt will be so much cheaper" then you're already in the process of making this transition a path to greater indebtedness. Again this is all just based on a greatest hits compilation called Dumbest Choices Of My Youth, maybe you are facing this all in a much better and more realistic frame of mind. Finally I imagine you don't have to pay any of this back at all while you're in school? Maybe don't just accept that as the reasonable status quo - put something at least - maybe half the interest you're currently paying each month on those credit loans? Or 1.5X the interest the student loans accrue - against the new debt every month.
Getting back to your statement I quoted above though - if you don't make this part of an overall strategy to fix those long-term financial issues then it will end up as part of an unintentional strategy that makes those long-term financial issues worse. Don't believe you're special in this regard if you have no evidence to back it up. From painful experience that is being slowly corrected on a depressingly long time scale.
posted by Luke Skywalker at 8:21 AM on July 31, 2013 [2 favorites]
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I say do it. If you have no other debt, only 8k in federal student loans is a pretty easy payment to make per month.
posted by MisantropicPainforest at 10:25 AM on July 30, 2013 [1 favorite]